In this piece, I have evaluated entertainment stocks, DraftKings Inc. (DKNG) and Monarch Casino & Resort, Inc. (MCRI), to determine which could generate better returns. After thoroughly evaluating the fundamentals of these stocks, I think MCRI could be a better choice.
Before discussing the reason behind my bullishness about MCRI, let’s look into what’s happening in the entertainment space.
Continuous advancements in technology have played a pivotal role in driving the growth of the entertainment industry market. Innovations in streaming platforms, virtual reality, augmented reality, and high-definition displays are expected to revolutionize how content or services are consumed.
According to a Custom Market Insights study, the global entertainment industry market size and share revenue are expected to reach $49.56 billion by 2032, growing at a CAGR of about 11%.
Technological advancements have driven unprecedented growth of online gambling activities, such as online casinos and betting. The global online gambling market is expected to reach $213.58 billion by 2028, growing at a CAGR of 12.56%.
DKNG is a clear winner in terms of price performance, with 25.9% gains over the past month compared to MCRI’s 4.8% returns. Also, DKNG gained 134.8% over the past nine months compared to MCRI’s 27.7% returns.
However, here are the reasons why I think MCRI might perform better in the near term:
Recent Developments
On June 28, 2023, DKNG announced that the company is no longer pursuing the acquisition of the U.S. business of PointsBet Holdings Ltd. (PointsBet). The company thanks PointsBet for their time and access over recent weeks.
Conversely, during the recent quarter, DKNG unveiled that it went live with mobile sports betting in 21 states that collectively represent approximately 44% of the U.S. population following its online Sportsbook product launch in Massachusetts on March 10, 2023.
Moreover, in the same quarter, DKNG also unveiled that it is live with iGaming in 5 states, representing approximately 11% of the U.S. population.
Recent Financial Results
During the fiscal first quarter that ended March 31, 2023, DKNG’s revenue came in at $769.65 billion. Adjusted EBITDA came in at negative $221.61 million. Also, its net loss attributable to common stockholders came in at $397.15 million, and the loss per share attributable to common stockholders came in at $0.87.
On the contrary, MCRI’s net revenue increased 7.3% year-over-year to $123.68 million for the second quarter that ended June 30, 2023. Its adjusted EBITDA rose 6.8% from the previous-year quarter to $42.13 million. Its EPS increased 15.2% year-over-year to $1.14.
Past And Expected Financial Performance
Over the past three years, DKNG’s revenue grew at an 84.6% CAGR. Analysts expect DKNG’s revenue to grow by 27% in the current quarter ending September 2023. However, its EPS is expected to be negative $1.82 this year and negative $0.25 in –to-be-reported quarter ended June 2023.
Conversely, MCRI’s revenue increased at a CAGR of 36.7% over the past three years. Its revenue is expected to increase 4.1% this year and 1.1% in the current quarter. Its EPS is expected to increase 3.6% in the current quarter ending September 2023.
Valuation
DKNG’s forward P/B multiple of 13.85 is higher than MCRI’s 2.69. DKNG’s forward P/S of 4.40x is also higher than MCRI’s 2.83x.
Thus, MCRI is relatively affordable.
Profitability
DKNG's trailing-12-month EBIT margin of negative 52.78% compared to MCRI’s 24.59%. In addition, DKNG’s trailing-12-month EBITDA margin of negative 45.64% compares to MCRI’s 33.67%.
Furthermore, DKNG’s trailing-12-month ROCE, ROTC, and ROTA of negative 108.80%, 33.93%, and 34.97% are lower as compared to MCRI’s 18.74%, 13.76%, and 13.11%, respectively.
Thus, MCRI is more profitable.
POWR Ratings
DKNG has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. Conversely, MCRI has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. DKNG has a D grade for Quality. DKNG’s trailing-12-month gross profit margin and CAPEX/Sales of 34.72 and 1.19 are 1.3% and 63.3% lower than the 35.19% and 3.24% industry averages, respectively.
On the other hand, MCRI has an A grade for Quality. MCRI’s trailing-12-month gross profit margin and CAPEX/Sales of 65.99% and 8.11% are 87.5% and 150.3% higher than the 35.19% and 3.24% industry averages, respectively.
Among the 27 stocks in the Entertainment - Casinos/Gambling industry, DKNG is ranked #25, while MCRI is ranked #3.
Beyond what we’ve stated above, we have also rated both stocks for Growth and Sentiment. Get all DKNG ratings here. Click here to view MCRI ratings.
The Winner
Gambling and live casinos are highly sensitive and responsive to new technologies and innovations. With the industry gaining popularity, DKNG and MCRI are well-positioned to benefit.
However, given DKNG's relatively weak financials, low profitability, and elevated valuation multiples, MCRI could be a better investment now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Entertainment - Casinos/Gambling here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
MCRI shares were trading at $71.28 per share on Friday morning, up $1.34 (+1.92%). Year-to-date, MCRI has declined -6.87%, versus a 19.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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